Oracle (ORCL) reports first-quarter fiscal 2017 results after the close, and this quarter could be a major turning point for Oracle's cloud business.
Year to date, shares of Oracle are up about 10.5%. Despite being one of the largest database and software companies on the planet, Oracle's name almost never comes up when talking about cloud computing. Oracle's cloud offering is just 8% of revenue. If you think about it, Oracle is exactly the reason a lot of IT departments are rushing toward the cloud. Corporate IT departments are fed up with pushy salesman, endless software upgrades and patches and phenomenally expensive service agreements that hold your data hostage.
After putting up a string of pathetic "growth" numbers (1% to 3%) over the last five years, it seems Oracle has gotten its act together and is ready to grow its cloud business. The company has rewritten its entire software stack for the cloud and is ready to compete again.
Oracle's traditional middleware businesses such as CRM (customer relationship management), ERP (enterprise research planning), and SCM (supply chain management) are being eaten alive by the cloud. There's a new cloud start-up every five minutes.
Even though former Oracle employees founded many of the early cloud companies (and CEO Larry Ellison invested in a few of them), management largely ignored companies such as Salesforce.com (CRM) . Oracle finally woke up when Salesforce took nearly 50% of the CRM business.
License revenue growth has stalled out. Oracle ended fiscal 2015 with 0.7% license growth as customers turned away from buying and managing software. Cloud customers are saving a ton of money. For example, according to Merrill Lynch, the most expensive Aurora database as a service (DBaaS) offering that Amazon (AMZN) sells would cost roughly $16,000 to 20,000 per year, while an Oracle database installation would cost five times that.
Oracle is expected to report first-quarter results today after the close.
When Oracle reported fourth-quarter fiscal 2016, we began to see cloud growth outstrip license growth. In the quarter, cloud (SaaS/PaaS) revenue was $691 million, up 5%, while license revenue grew 1.3% to $2.76 billion. Total revenue was $10.6 billion, up 2%. Total gross profit rose 2.8%, while cloud profits grew 6%. Gross margin was 81.9% and operating margin was 45%.
For the first quarter, analysts are forecasting total revenue of $8.6 billion. Of that total, cloud revenue is expected to be $800 million, up 77%. As the mix changes from license to subscription, total revenue growth should begin to move higher.
We saw the same thing with Adobe (ADBE) . At first there was some hesitation and confusion as users transitioned from pre-packaged/licensed software to a cloud subscription. Once users adopted the subscription, everything fell into place. Subscription revenue took off and license revenue declined. Margins trended higher as subscription revenue is more profitable. Subscription revenue reoccurs year after year.
This could be the quarter where the cloud comes together for Oracle. If I'm right, this quarter will be a major inflection point for Oracle shares, too. Oracle should beat and raise guidance every quarter this year. The swing in investor sentiment should be huge and I think it will drive Oracle over $50 per share this year.